The rising cost of living is placing household budgets under pressure. As a landlord, you may worry about whether your tenants will fall into arrears. So, it’s worth being aware that there are steps you could take to protect your income.
According to Zoopla, average rent in the UK hit £1,126 in April – £110 higher than a year ago. Coupled with other rising costs, renters may be more likely to default. A tenant falling into arrears could mean you’re unable to make mortgage repayments on your rental property or even meet your other personal financial obligations.
So, you may want to take steps to protect your income. Here are four options you could consider.
- Check the references provided by new tenants
If you’re searching for new tenants, doing your homework before signing an agreement might be beneficial. Requesting references could help you find reliable tenants.
Of course, it doesn’t eliminate the risk of a tenant missing a payment as unexpected events, such as job loss or illness, can affect anyone. Yet, failing to pay rent several times in the past could be a red flag when reviewing prospective tenants.
You may also want to request proof of income and conduct a credit check. While this may slow down the process, it could put your mind at ease.
- Ask tenants to name a guarantor
A survey from letting platform Goodlord suggests landlords are more frequently relying on guarantors.
The number of tenants earning between £25,000 and £49,999 a year that have been asked to provide a guarantor increased by 58% between 2020 and 2022. It’s still a relatively small proportion, at around 5.8% of all tenants in this income bracket. But, as interest rates continue to rise, more landlords may consider guarantors essential.
As a landlord, a guarantor could provide you with more security when agreeing to new tenancies.
The guarantor would agree to pay rent if the tenant missed a payment. It could mean your income isn’t affected by unforeseen circumstances. Usually, a guarantor will commit to all the obligations of a tenancy agreement, such as paying for damage to the property if necessary.
You may decide to set out conditions for the guarantor, such as a minimum earned income or that they are a homeowner themselves, to provide additional reassurance.
While a guarantor may be useful security, keep in mind that it could also reduce the number of potential tenants interested in your property.
- Request a higher deposit to cover potential arrears
There are regulations around how much deposit you can ask tenants to provide. If you’re not already requesting the maximum, increasing the deposit needed for your property could provide some extra security.
Since 2020, the maximum deposit on most tenancies is five weeks’ rent. This may increase to six weeks’ rent if the annual rent is more than £50,000. This cap applies to all properties, including those that are furnished.
- Take out appropriate landlord insurance
Finally, taking out appropriate landlord insurance may provide you with a financial safety net if your tenant doesn’t pay their rent. Insurance that includes a rent guarantee could cover your rental income for a defined period if your tenant fell into arrears.
Not all landlord insurance includes cover if a tenant doesn’t pay. So, if it’s something you’re worried about, reviewing the insurance you already have in place could be valuable.
When you need to take out new insurance, noting what cover you consider essential could help you find the right provider for you. Here are some other types of cover you may want to consider:
- Liability insurance could provide you with protection against damage claims if accidents occurred within the property. For example, if someone slipped on loose flooring.
- Contents insurance would cover items within the property, which can be particularly valuable if you are letting out a furnished home.
- Loss of rent insurance may pay out a regular sum if you’re unable to rent out the property due to damage making it unhabitable.
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Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Buy-to-let (pure) and commercial mortgages are not regulated by the Financial Conduct Authority.
Your property may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
